Insights & News

Keeping it in the Family?

Though not of their making, family firms will play a vital role in the economic recovery from the current recession – they are major contributors of new job and wealth creation. Innovative, resilient and adaptable, succession is not always right or practicable for a family firm. Where a sale is the best route, their potential is sometimes the most attractive for acquirers.

How did we get where we are?

The current recession is the culmination of one of the most distorting decades. Governments – most notably in the West – kept interest rates too low for too long, chasing conveniently skewed inflation targets which were set too high in light of price deflation being imported from India, China and other low cost economies.

There has been lax control over the supply of money leading to a boom of easy personal and corporate credit causing asset bubbles. In the absence of effective regulatory oversight, reckless speculation by banks was permitted, dealing in complex financial derivatives which no one, not even the bankers, really understood. Business models became distorted by relying on excessive debt, and the perception of management competence has subsequently been exposed in many such firms. Salary levels, job and wealth creation in some firms and sectors have proven to be unsustainable.

Family values

Family businesses largely didn’t succumb to these distorting conditions. Most continued to practice traditional good governance by running sound, profitable businesses with low debt. Thankfully, family businesses are generally more risk averse and likely to take a patient approach to growth, and as such, provide, in many cases, a solid platform for future growth.

BCMS Corporate is itself, a family business, and as many of our clients are founding, second, or third generation family business owners, it is right that we declare an interest when championing family businesses. Surveys from a range of independent sources confirm that family businesses are fundamental to innovation, job and wealth creation. In fact, according to The International Family Enterprise Research Academy (IFERA), there is a very close correlation between the number of family businesses in an economy and entrepreneurial activity. The Global Entrepreneurship Monitor also asserts that most entrepreneurial start-ups usually begin as family businesses.

However, it is perhaps the behavior of owners which really reveals the true nature and relative strengths of family businesses. Particularly pertinent to the current economic circumstances are findings in the Coutts 2005 Family Business Survey which revealed that family firms are more likely to invest for the long-term and focus on long-run return rather than quarterly results.

There is evidence that families tend to draw smaller salaries and dividends, allowing more profits to be reinvested back into the business. In a further survey “Trust as a competitive advantage: Why family firms have an edge in the global marketplace,” by Baskin, it is argued that family businesses are more prepared than other firms to continue investing during downturns, giving them an advantage over public and private equity-owned firms where investment tends to follow cash flow more closely. Other findings across a range of surveys suggest that in family firms, managers and owners interests are better aligned, staff loyalty is higher, working practices are more flexible, corporate social responsibility is taken more seriously and the management approach is more flexible with quicker decision making.

There are also well documented disadvantages such as the danger of nepotism; a reluctance to bring in outsiders or Non-Executive Directors in larger firms; family conflicts, such as divorce and infighting, all of which might disrupt the business and hamper growth. There is good evidence, however, that the advantages outweigh the disadvantages. Loyola University Chicago created a Family Firm Stock Index to track the performance of publically traded, family-run firms headquartered in Chicago, which outperformed local and national indices over a 5 year period from 1990 to 1995.

Succession or sell

Despite their many strengths, family firms do struggle in much the same way as any other private firm with the issue of succession or exits. An annual survey by the Department for Trade and Industry (DTI, now part of the Department for Business Enterprise and Regulatory Reform DBERR) found that 77% of family firms in the SME sector are controlled by the first generation, 10% by the second generation and 6% by the first and second generation. Further, a Barclays survey of family firms, “A Family Affair; Today’s Family Businesses,” suggests that most have no definitive plans about what to do with the firm in the future, with 61% of owners saying they had made no decision about what would happen when they stepped down from the helm. Of the remainder, 16% had already decided on a successor, 13% planned to sell the business, while 10% planned to close down.

Where owners of family firms no longer see generational transfer as viable or desirable, and the business has potential for growth, this becomes an ideal situation to seek a sale of the business. This exit strategy not only is beneficial for the owners’ financial future, but can also be in the best interest for the employees and their continued career paths.

Their own words

One of our clients was Stuart and Gail Shreeve, a husband and wife team who established their family business Somers Refrigeration in 1990, a business supplying temperature controlled vehicles predominantly to the food industry.

Typical of many family businesses, Stuart and Gail were very close to their staff and the successful buyer had to offer stability and continuity for them. One prospective buyer had plans to close the existing site and consolidate operations which would have threatened jobs – this was rejected immediately by Stuart and Gail. Ultimately, the sale of the business was concluded with the “right” purchaser, who would maintain the company culture, at the “right” price for Stuart, Gail and the staff. Stuart and Gail’s expertise has not been lost to the business; they have continued to provide consultancy services and have set up a joint venture with the new owners.